Compound interest calculation

I think my bank is underpaying me interest on a 5 year certificate of
deposit.

How can I calculate the interest I should get on, say, $2,500 for a five
year term and show how much interest accrues at certain intervals?

Ike

Dear Ira

I think you are on the wrong tram - banks never pay more, less if they can get away with it!

This is very difficult to work out unless you are very clear on the how the interest is calculated. I don't know if you gonna win here but this is one way :-

Presuming that your principal sum is $100,000 and the SIMPLE interest is say 10% per annum calculated daily on the minimum amount at the end of that day paid say quarterly (this would mean that the interest whilst it has been worked out using your initial deposit of $100000 does not get credited to your account until 91st day - , this is what you should be getting at the end of the month (30 day month assumed) :-

Your total balance as at end of Day1 -> 100000 * (1 + ((10/100) * (1/(12 * 30))))
= 100027.77

Your total balance as at end of Day2 -> 100027.77 + 100000 * (1 + ((10/100) * (1/(12 * 30))))
= 100054.54

and so on.

If for all the 90 days you do not withdraw any money from your account, then your account balance as at end of day 90 would be = 27.77 * 90 + 100000 = 102499.30. Hence this would be maximum account balance you can expect as at end of the quarter (3 months at 90 day month). This point forward, the amount used to calculate your future interests for the next 90 days would be 102499.30 instead of 100000.

However, if you were to have withdrawn any monies in that 3 month period, the intrerest that you can expect to get would be less than above figure since the base amount they would use would be the least amount as at end of the day for calulation of the interest for that day.

But in the unlikely event of your bank being very generous and crediting your account with the interest daily, that would be equivaluent to a COMPOUND interest of 10 % per annum, if which case the account balance caculations follow this formula (this can very easily be derieved as well) :-

Account balance as at end of 'n' days = Principal * Power((1 + Daily Interest Rate), n) - This is the Excel worksheet function Power(number, power)
= 100000 * Power((1 + (10/(100 * 12 * 30))), 90)
= 102531.16

Hence your interest in this case would be $31.86 more.

This is again on the presumption that you do not withdraw any money from your account for the full quarter. Should you do that then again they would use the least balance amount as at end of the day to calculate the interest for that day.

Hopefully this should clarify the matters to some extent.


Best regards


Deepak Agarwal

Ira,

It depends on frequently the interest is paid. The formula to calculate a
Future value is:

FV = PV*(1+i/m)^(m*T)

Where:

FV = Future value
i = interest
m = number of times interest is paid in a year
T = number of years

So the future value of USD 2500 for five years (accumulated once a year) is
given by (at a rate of, say, 10%:

FV = 2500*(1+0,1)^5= USD 4,026.28

Using the FV function in Excel you get =FV(0.1,5,,-2500). If interest is
paid more often, divide the interest by the number of times it is paid and
multiply the period (Nper) by this number to proportionate the interest. For
example, if interest is paid monthly:

=2500*(1+0.1/12)^(12*5) = USD 4,113.27

or

=FV(0.1/12,5*12,,-2500) = USD 4,113.27

I hope it helps. Without knowing the characterists of the CD, it is
difficult to determine its exact value, but the above should help you to have
a better idea...

Regards,
Robert

*

Thanks!

Ike


"cmart02" <[email protected]> wrote in message
news:[email protected]...
> Ira,
>
> It depends on frequently the interest is paid. The formula to calculate a
> Future value is:
>
> FV = PV*(1+i/m)^(m*T)
>
> Where:
>
> FV = Future value
> i = interest
> m = number of times interest is paid in a year
> T = number of years
>
> So the future value of USD 2500 for five years (accumulated once a year)
> is
> given by (at a rate of, say, 10%:
>
> FV = 2500*(1+0,1)^5= USD 4,026.28
>
> Using the FV function in Excel you get =FV(0.1,5,,-2500). If interest is
> paid more often, divide the interest by the number of times it is paid and
> multiply the period (Nper) by this number to proportionate the interest.
> For
> example, if interest is paid monthly:
>
> =2500*(1+0.1/12)^(12*5) = USD 4,113.27
>
> or
>
> =FV(0.1/12,5*12,,-2500) = USD 4,113.27
>
> I hope it helps. Without knowing the characterists of the CD, it is
> difficult to determine its exact value, but the above should help you to
> have
> a better idea...
>
> Regards,
> Robert
>
> *
>